The welfare state and your life savings are two cars heading down a one-lane road in opposite directions. One must yield, or there will be a crash.
For Americans who believe in the old-fashioned virtues of hard work, self reliance and respect for private property, the solution is obvious. The welfare state must yield.
For politicians who believe in the welfare state and redistributing wealth, the solution is equally obvious. Your savings must yield.
Barack Obama is of the latter group. In the new health care proposal he outlined this week, he suggested a series of unprecedented tax increases that would extend the greedy hands of government into the life savings of hard-working Americans.
These new taxes would essentially construct a new fiscal pipeline capable of carrying money out of the savings of private citizens and dumping it into government coffers specifically for subsidizing Medicare under the new health care system Obama envisions. The White House summary of Obama's proposal presents this would-be pipeline as a facilitator of economic justice.
"Under current law, workers who earn a salary pay a flat tax of 1.45 percent of their wages to support the Medicare Hospital Insurance (HI) trust fund, but those who have substantial unearned income do not, raising issues of fairness," says the summary. "The Act will include an additional 0.9 percentage point Hospital Insurance tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly. In addition, it would add a 2.9 percent tax for such high-income households to unearned income including interest, dividends, annuities, royalties and rents (excluding income from active participation in S corporations)."
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There are, of course, multiple unanswered questions here. For starters, wouldn't increasing the Medicare payroll tax on "households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly" violate Obama's pledge that, as his campaign literature put it, he would "not raise any tax rate on families making less than $250,000 per year, period." Plenty of single Americans, who are raising children or taking care of other dependents, file their taxes claiming "head of household" status. Aren't they "families" covered by Obama's tax pledge?
Secondly, wouldn't slapping these households with a new 2.9 percent tax on interest, dividends, annuities, royalties and rents also violate Obama's tax pledge?
But the most important question is this: Would allowing the government to tap into the savings of one group of Americans to pay entitlement benefits to another group create a system of taxation that could swiftly destroy the American dream?
Yes, it would. Here's how:
When Obama took office, the federal government confronted a massive long-term fiscal problem. The nonpartisan Peter G. Peterson Foundation estimated that revenues expected under the current tax system would fall $56.4 trillion short of covering the current federal debt and the long-term costs of promised entitlement benefits. That $56.4 trillion equaled $184,000 for every living American and $435,000 for every full-time worker. Given the fiscal trajectory at the end of 2008, the government was headed toward spending 18 percent of gross domestic product by 2028 just to cover the annual costs of Social Security, Medicare, Medicaid and interest on the debt.
To put that in perspective, the entire federal government cost only 18.2 percent of GDP in 2001 and only 19.6 percent as late as 2007. By 2028, if overall government expenditures were held at the 2001 level as a share of GDP, welfare-state entitlements would squeeze out all other federal spending -- including maintaining an Army and a Navy.
The Mack truck of the welfare state was speeding down the one-lane road straight at the little compact car of your life savings.
How did Obama respond? He massively ramped up short-term spending, submitting a budget that will spend an average of 24.13 percent of GDP over the next four years -- more than the average of 19.13 percent FDR spent during the Depression and World War II. For the long run, Obama is trying to establish a national health care system in which the federal government will subsidize health insurance not only for the elderly and the poor but also for the middle-aged and the middle class.
Redistributionist politicians like Obama see their core constituents as the net recipients of government benefits, not the net payers. Increasing the number of net recipients serves their ideology and political interests.
The new taxes Obama wants to impose on interest, dividends, annuities and rents to pay for his health care plan are in fact taxes on the life savings of the net payers -- on their 401(k)s, savings accounts, paid-off mortgages and life insurance policies -- to cover benefits for the net recipients. The redistributionists would ultimately need $435,000 from every full-time worker to cover the welfare state's unfunded liabilities -- even if Obama's health care plan were never enacted.
Obama is pointing them down the road where they will find it.
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